Russell Stability Indexes™: Usage in Fund and Portfolio Analysis

In 2010, Russell launched the Russell Stability Indexes. We believe that the index series is very useful for investment practitioners and fund analysts looking to better understand exposures and risk factors – particularly those associated with sensitivity to economic cycles and price of stocks – exhibited by funds and portfolios.

The Russell Stability Indexes are constructed by splitting the Russell Indexes (both U.S. and Global) by level of stability; the more stable half of stocks is deemed the Russell Defensive Index™, the less stable half is called the Russell Dynamic Index™.

The intention for Russell Stability (Defensive and Dynamic) Style Indexes is not to replace the traditional Russell Valuation (Growth and Value) Style Indexes, but to provide a third dimension of style. A stock is both Growth or Value, as well as Defensive or Dynamic, and they are not synonymous. And a further combination of Growth, Value and Defensive, Dynamic indexes provides deeper analysis into style.

When categorizing stocks by stability, Russell takes into account the quality (debt/equity, earnings variability and ROA) and price volatility of stocks. They are not merely measures of value or volatility alone. In this regard, they reflect valuable risk factors for practitioners.

Why use them?

Risk Factor Analysis: Russell’s Stability Style Indexes are compelling for the insight they offer as risk factors in equities, managers and portfolios. This can give MPI Stylus users a better understanding of the sensitivity to economic and market cycles that the funds and portfolios they analyze behave as if they are exposed to, and which drive performance. A more complete picture of risk can emerge when combining such analysis with forward-looking forecasting.

Simpler Analysis: Thirdly, MPI’s Research team has found that using a factor map of Russell Stability Style Indexes leads to simpler analysis for 2/3 of funds – simpler meaning analyses that require fewer factors to explain a fund or portfolio’s behavior while not compromising fit or explanatory power significantly.

Certainly, analysis with traditional Valuation Style Indexes is still applicable to a significant proportion of funds. Indeed, about 1/3rd of analyzed funds can be described as well or better with a traditional map.

At a higher level, it’s important to note that the expansion of the index universe – especially those that reflect investment strategies and risk factors – and the adoption of new series encourages the evolution of performance attribution and returns-based analysis. The increased ability to explain the sources of a fund’s returns with new factors suggests formerly unidentifiable portions of a manager’s alpha can become identifiable as betas.

Here are a few examples of funds analyzed with both factor maps, i.e., Russell U.S. Stability Style Indexes and Russell U.S. Valuation Style Indexes, which show marked differences in complexity of model and explanatory power: